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The overlooked UK funds that have dodged the oil crash

13 January 2015

The fall in the oil price has hit most UK funds hard, but ethical portfolios, with their natural underweight to the sector, have fared relatively well.

By Gary Jackson,

News Editor, FE Trustnet

The plummet in the price of oil over recent months has prompted weakness in the stock market but a group of funds that are often passed over by retail investors have held up well during the turmoil.

Oil has tumbled since the summer of 2014 owing to oversupply issues exacerbated by OPEC’s refusal to cut back production to support prices. Brent crude oil is currently trading at around $45 a barrel, with FE Analytics showing a 47.2 per cent fall in the S&P GSCI Brent Crude Spot index since the start of June.

Oil & gas companies account for a large slice of the UK stock market, with the sector making up 14.8 per cent of the FTSE 100 index and 12.7 per cent of the FTSE All Share. This means the two indices have trended down as oil has slid, although not to the same extent.

Performance of indices since 1 June 2014

  

Source: FE Analytics

Over the same period the average fund in the IA UK All Companies sector has lost 1.06 per cent, with 183 of the peer group’s 273 members - more than two-thirds of the sector - showing a negative return.

Some of the funds posting the greatest losses over this time frame - such as Schroder Core UK Equity, M&G Recovery and Scottish Widows UK Select Growth - have a high weighting to oil stocks, with the sector accounted for about 15 per cent of the three portfolios mentioned.

A quick look at the funds which have made money since the start of June is dominated by those with a bias to mid-caps, which have outperformed the FTSE 100 and All Share since the summer. Old Mutual Global Investors’ Richard Watts and Slater Investments' Mark Slater, who both hunt outside the mid-cap space, both feature highly. 

However, the list also shows that ethical funds - which are relatively ignored by retail investors - have made positive returns while UK equities have sank, thanks that their natural underweight to the beleaguered oil & gas stocks. The latest figures from the Investment Association show just 1.2 per cent of industry funds under management are in ethical portfolios.

An equally weighted portfolio of 13 ethical funds within the IA UK All Companies sector has risen 1.46 per cent since the summer, significantly outperforming the 2.50 per cent fall in the FTSE All Share and the 3.32 per cent slide in the FTSE 100.


Performance of portfolio vs indices since 1 June 2014



Source: FE Analytics

Charlie Thomas, manager of the Jupiter Ecology fund, which invests globally, says ethical funds’ avoidance of oil & gas companies can be beneficial to UK investors, who tend to have a high exposure to the sector through more ‘conventional’ funds.

“There is more of a natural hedge. It doesn’t mean you won’t get any contamination because it’s impossible to avoid it but [lacking energy exposure] means that’s broadly the case,” the manager said. “In and around the energy sector, we’ll see some impact but nothing like the kind of thing you’d get with a conventional portfolio.” 

Our data shows the £419.1m CIS Sustainable Leaders fund tops the list of the ethical outperformers with a gain of 5.10 per cent since 1 June. The fund is headed by FE Alpha Manager Mike Fox and holds five FE Crowns for superior performance in terms of stock picking, consistency and risk control over recent years.

Fox has just 1.4 per cent of his portfolio in the oil & gas sector. In his most recent update, the manager noted that the oil price fall aided a rise in US consumer spending, which was a performance driver for holdings such as Apple, Amazon, Pulte Homes and CSX.

CIS Sustainable Leaders is currently first quartile over one, three and five years, as well as over three and six months, achieving this will less volatile than its average peer. The fund has a clean ongoing charges figure (OCF) of 0.78 per cent.

Andrew Jones’ £131.3m Henderson Global Care UK Income follows with a 4.20 per cent rise. The fund focuses on “companies contributing to social well-being and the protection and wise use of the natural environment”, and has holding just 2 per cent in oil & gas names.

The fund is also in the sector’s top quartile over one, three and five years. In 2014, when the average IA UK All Companies fund made just 0.64 per cent, the portfolio was up 7.3 per cent. It has a clean OCF of 0.86 per cent.

The £203.9m Alliance Trust Sustainable Future UK Growth fund, managed by Peter Michaelis and Neil Brown, is in third place following a 3.94 per cent gain. This fund is second quartile over one, three and five years but in the top quartile over shorter time frames.

It has only 0.6 per cent in oil & gas business, making the sector is largest underweight by a wide margin. One of the fund’s key themes is ‘climate change and energy efficiency, which seeks opportunities in the move to reduce carbon intensity and increase energy efficiency.

Alliance Trust Sustainable Future UK Growth has clean ongoing charges of 0.85 per cent.



Source: FE Analytics 


Chase de Vere’s Patrick Connolly, however, says investors shouldn’t necessarily flock to ethical portfolios even if they are negative on the outlook for oil and stocks linked to it.

“Ethical funds will always perform comparatively well when the sectors they cannot hold are underperforming, whether than be energy, tobacco or whatever.”

“There will always be periods where ethical funds perform well or badly depending on how those sectors they avoid are doing,” he said.

“But you don’t have to go ethical to avoid that sector, you could simply invest with a manager that has a lot of flexibility and a lot of freedom to pick the stocks they want.” 

“I would prefer to take a chance with a proven stock picking manager rather than avoiding energy entirely by going with an ethical fund.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.